Halton International Inc & Anor v Guernroy Ltd (2006)

Summary

A claim to certain shares on the basis that they were held on a constructive trust was statute-barred because the shares had come into existence only as a result of the transaction impeached, so that the constructive trust alleged was not of a kind that fell within the exception in the Limitation Act 1980 s.21(1) for claims to recover trust property.

Facts

The appellants (H) appealed against the decision that their claim was statute-barred. H and the respondent (G) were shareholders in an airline company. When the company had needed to raise substantial fresh capital, the shareholders had signed an agreement vesting voting control in G. Thereafter, G used the voting agreement to issue fresh shares to itself, at the same time disapplying H's rights of pre-emption. The overall effect was that H's interests were diluted. H's case was that H had not become aware of the allotments until several years after they took place. Two years after that, H issued proceedings asserting that G's use of the voting agreement had been in breach of fiduciary duty. The judge rejected the claim that G owed such a duty and held that, in any event, the claim was statute-barred. H submitted that, assuming G had been under a fiduciary obligation to exercise its rights under the voting agreement for the benefit of H and not for its own benefit, G held a proportion of the shares issued on constructive trust for H and, therefore, the claim was not statute-barred because it fell within the exception in the Limitation Act 1980 s.21(1) for claims by beneficiaries for breach of trust or to recover trust property.

Held

There were two kinds of constructive trusts: those where the defendant had assumed the duties of a trustee by a lawful transaction that was independent of and preceded the breach of trust and was not impeached by the claimant (class 1); and those where the trust obligation arose as a direct consequence of the unlawful transaction that was impeached by the claimant (class 2), Paragon Finance Plc v Thakerar & Co (1999) 1 All ER 400 applied, JJ Harrison (Properties) Ltd v Harrison (2001) EWCA Civ 1467 , (2002) 1 BCLC 162 and DEG-Deutsche Investitions und Entwicklungsgesellschaft MBH v Koshy (2003) EWCA Civ 1048 , (2004) 1 BCLC 131 considered. Only class 1 was treated as a trust for the purposes of the exception for trust property in s.21(1) of the Act. The judge had been right that the instant case was not within class 1, as exemplified by the case of Harrison, but within class 2, as exemplified by DEG-Deutsche. Even if the voting rights were class 1 property, that was not what H were seeking to recover. The voting rights were the means by which G had obtained the new shares. For the exception to apply there had to be a trust for specific existing property, not merely for the means to obtain it in the future. The way in which the new shares came into existence was not a mere accidental characteristic but an essential feature of the transaction. The new shares came into existence by reason of the transaction impeached. Therefore, s.21(1) of the Act did not apply and the claim was statute-barred.